The Dynamic Role of Subnational Regions in Firm Performance

Abstract This study investigates dynamics of subnational regions in determining firm performance over time and by ownership type. We explain theoretically how subnational regions affect firm performance over time in the context of path dependence and the institution‐based view and test these predictions using annual data of manufacturing firms in China from 2000 to 2014 – before and after a major negative institutional shock (2008 financial crisis). Consistent with path dependence, regional institutional quality diverges across regions before 2008, a pattern that is disrupted post‐2008. Firm performance is increasing in institutional quality so that location effects are increasingly important before the financial crisis but less so post‐crisis. These effects are greater for private‐ than state‐owned enterprises consistent with differences in organizational objectives under the institution‐based view.